Dollar pares gains as investors cash in on boost from Fed's Powell

NEW YORK (Reuters) - The dollar retreated from a three-week high on Wednesday as investors cashed in on gains the currency made after two days of testimony by U.S. Federal Reserve Chairman Jerome Powell reinforced a strong economic outlook.

FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration shot January 21, 2016. REUTERS/Jason Lee/Illustration/File Photo

In congressional testimony on Tuesday and Wednesday Powell said he believed the United States was on course for years more of steady growth, and played down the risks to the U.S. economy of an escalating trade conflict.

Against a basket of six major currencies, the dollar rose to a three-week high of 95.4 before settling around 95.08, up 0.2 percent.

The retreat signaled a move by investors to cash in after “the dollar had a pretty good run,” said David Gilmore, partner at FX Analytics in Westbrook, Connecticut.

The dollar gained 0.43 percent against sterling as the U.K. currency was dragged to 10-month lows on weak inflation data and uncertainty over Britain’s plans to leave the European Union.

The Chinese yuan was down 0.41 percent against the dollar in offshore trading. Earlier in the session, U.S. President Donald Trump’s top economic adviser accused Chinese President Xi Jinping of holding up a U.S.-China trade deal.

The greenback reserved most of its gains against the relatively higher-yielding currencies such as the Australian, Canadian, and New Zealand dollars.

Though concerns the U.S. economy may be nearing a peak as evident from a flattening yield curve and falling inflation adjusted-yields, the widening rate differentials between the U.S. and other major markets also lifted the greenback.

MIND THE GAP

The Fed is expected to hike rates two more times in 2018 to tackle rising inflationary pressures. Comparatively, the ECB is expected to start raising rates only in mid-2019.

With U.S. rates continuing to rise and most other major central banks taking only tentative steps towards monetary normalization, many analysts expect more dollar upside. RBC is forecasting a year-end euro/dollar of $1.12.

The dollar rallied to as high as 113.13 against the yen, its strongest since Jan. 9. It was last at 112.85, slightly down on the day.

The euro fell 0.16 percent to $1.1640.

Reporting by James Thorne; Additional reporting by Gertrude Chavez-Dreyfuss in New York